A REIT to buy for high income

Here’s a solution for the ‘wannabe’ real estate investor searching for the simple answer to ‘How to make money in real estate’. You can earn almost six per cent—and someone else does all the work—with a diversified portfolio of office, commercial, and retail properties.

Toronto-based H&R Real Estate Investment Trust (TSX—HR.UN) owns, operates and develops commercial properties across Canada and in the United States.

H&R REIT has agreed to sell its freehold and leasehold interests in Scotia Plaza in Toronto for about $438.3 million. The REIT expects to receive net proceeds of $229 million, which will be used to repay debt, thus reducing leverage. This, in turn, will give it greater flexibility to grow its U.S. sunbelt apartment business through acquisitions.

H&R Real Estate Investment Trust has a portfolio of 40 office properties, 104 industrial properties, eight residential properties and three development projects with a fair value totaling about $13 billion, comprising over 44 million square feet. The REIT also has a 33.6-per-cent interest in ECHO Realty LP, which owns 207 properties, excluding properties under development and vacant land, comprising over 7.8 million square feet.

The REIT’s first-quarter financial results were slightly stronger than analysts’ expectations. For the three months ended March 31, 2016, H&R’s funds from operations (FFO) were $147.6 million, or $0.49 a diluted unit, compared with $139.9 million, or $0.47 a unit, in the same period of 2015.

The increase was primarily due to lease termination payments of $4.9 million and the stronger U.S. dollar. The lease termination payments were caused by lower occupancy at the REIT’s Primaris segment where leases were disclaimed by Target Canada Co. Consequently, overall occupancy declined to 95.8 per cent at the end of the quarter from 97.6 per cent at the end of last year’s first quarter.

H&R is in talks with potential tenants who may assume leases on most of the rental space vacated by Target Canada. And the REIT expects the new tenants will contribute about $9.3 million of annual base rent at H&R’s interest. That’s more than twice the $4.4 million that Target paid H&R for more rental space.

The units recently traded at 12.1 times the $1.91 a unit in FFO that H&R will likely earn in 2016. The annual distribution of $1.35 a unit yields 5.8 per cent. H&R is a buy primarily for its current high income.

 

Money Reporter, MPL Communications Inc.
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